- transfer prices
- The prices at which goods and services are bought and sold between divisions or subsidiaries within a group of companies.The transfer price is a cost to the receiving division and revenue to the supplying division: therefore the transfer price will affect the profitability of each division. In a complex organization there may be several buying and selling divisions in a group. Transfer prices can also apply between cost centres.Managers need to consider a complex range of issues when setting a transfer price. This is because transfer pricing can be used for several quite different purposes:• to provide information that motivates managers to make good economic decisions;• to provide information for evaluating the managerial and economic performance of divisions;• to maintain divisional autonomy;• to move profits between divisions, which may involve moving profits from one country to another to minimize tax on profits.As a result, those setting transfer prices may find that they face a conflict of objectives. For example, senior managers of a group may want to maximize profitability even though this will means reducing the autonomy of divisional managers. This may result in short-term increases in profitability but at the expense of the motivation of divisional managers in the long run.There are six main transfer-pricing methods: see cost-plus transfer prices, dual-rate transfer prices, full-cost transfer prices, marginal-cost transfer prices, market-based transfer prices, negotiated transfer prices
Accounting dictionary. 2014.